Lenders (banks, finance companies, credit card companies, credit unions and trust companies) rely on credit bureau to access your credit rating. If you have a good credit rating, stable employment, and sufficient collateral, your application for credit would likely be approved.
Credit bureau’s records however, are not always accurate. There are times where you have paid your account in full and yet it shows it is still unpaid. On the other hand, there would be a time where your unpaid accounts would no longer show on your file. It would be a problem however, when you are approved for a mortgage based on your credit bureau’s file where your unpaid debts no longer on your record.
The function of the credit bureau is basically to record consumers’ payment habits and not to wipe out unpaid debts. They are mandated by law to maintain the records on file for each individual consumer for a certain number of years from three to fourteen years. In Ontario if you file for bankruptcy for the first time it will stay in credit bureau’s record up to seven years, in some provinces it would be more.
Even if you did not pay your debts or you did not avail credit counseling, consumer proposal or bankruptcy, after a certain period of time those debts would be removed from your file for the law requires it. In such circumstance, it would appear your credit rating is good – no debts no derogatory records. It does not mean however, that your creditors could not pursue the collection activity on your outstanding debts because the creditors’ right to collect is not affected by the credit bureau’s action of cleaning up your file.
A good example was a person who purchased a house after his credit bureau file was cleaned up for his unpaid debts had been on file for more than the requirement of the law. He had a good and stable employment. With a clean credit bureau file and good employment, his application for a mortgage loan was approved.
After two years of owning the house one of his creditors was able to trace his whereabouts and collection process was reactivated. Said creditor, went to court and was able to obtain judgment against him and his house was attached.
If you are aware that you have outstanding debts for years and your credit bureau file is clean, you may not buy a house until you have paid or settle your outstanding debts otherwise, you are assuming the risk of losing your house as in the above case scenario.
If you do not have the means to pay your debts you have to consider credit counseling, consumer proposal or bankruptcy at the outset of your financial problem to clear up your debts sooner rather than doing it later.